Investment Highlights

• We maintain BUY on ATA IMS (ATA), formerly known as Denko Industrial Corporation, with a lower fair value of RM1.72/share (previously RM1.76/share). Our fair value is pegged to a CY19F PE of 13x. We have trimmed our FY19F earnings forecast by 7% but leave FY20-FY21F forecasts relatively unchanged, adjusting for lower-than-expected box-build orders for FY19.

• ATA’s 1QFY19 results came in slightly below our expectations at RM31mil, accounting for 23% of our full-year forecasts and 24% of consensus estimates.

• 1QFY19 net profit soared 42% YoY, fuelled by expansion in revenue (+38% YoY) mainly driven by stronger box-build orders. This was enabled by the group’s capacity expansion to support growth in orders from its key customer.

• On a QoQ basis, 1QFY19 net profit and revenue increased by 83% and 9% respectively on the back of sustained orders from its customers. We believe the boost in earnings was supported by its two additional lines for its floor-care product in its Jalan Dewani, Johor Bahru factory.

• Status of capacity expansions:

• ATA’s 4 additional assembly lines in its Jalan Dewani factory are expected to boost the group’s earnings in FY19. Of the 4 lines, 2 for its floor-care product are currently in production, while the other 2 for its healthy lifestyle product are scheduled to commence by end-2QFY19.

• The group’s Jalan Hasil factory is slated for completion in September 2018, positioning the group favorably in its future job bidding. We have not factored in any earnings contribution from this factory.

• The completion of its additional 116K sq ft warehouse has been pushed to October 2018. This will increase warehouse space by 55%, bringing total warehouse space for the group to 328K sq ft. The delay would not impact ATA’s current operations as its existing warehouse space is sufficient.

• Stronger quarters ahead: 2Q and 3Q are seasonally stronger quarters for ATA. Furthermore, the additional assembly lines for its healthy lifestyle product in its Jalan Dewani factory are expected to come onstream.

• We continue to like ATA due to: 1) it being a prime proxy to its key customer’s continuous innovation and robust growth prospects; 2) its position as the largest supplier of filters for its key customer globally, commanding a formidable market share of 80-85%; and 3) its PAT is expected to grow at a stunning CAGR of 24% for FY19-FY21F, underpinned by higher box-build orders for new products and margin expansion from greater cost efficiencies.

Source: AmInvest Research - 29 Aug 2018